Great News! But for Whom?

It smells like a recovery in the making. But at what price?

It smells like a recovery in the making.
Start with the Bush administrations economic stimulus package, coupled with huge investments in cleaning up and rebuilding lower Manhattan. Then add an expected surge in federal outlays for military and intelligence technologies in the war against terrorism - and perhaps even the private government Internet proposed last week by Richard Clarke, the presidents newly appointed special adviser for cyberspace security. Finally, append an influx of new corporate dollars earmarked for increased network security. It all adds up to a magic formula for lifting the tech sector from the doldrums of recession.

But at what price? While the algorithm seems promising, it is built on unknowable variables that could turn it into a formula for chaos.

For example, while its clear that a lot of federal dollars will be funneled into rebuilding infrastructures destroyed in the Sept. 11 terrorist attacks, the real key to a broad-based recovery in the technology sector probably lies in another, unrelated part of President George W. Bushs proposed stimulus package - an accelerated depreciation schedule for certain kinds of capital equipment.
Depreciation enables companies to reduce their taxable earnings by writing off the cost of an asset over its estimated useful life. It is among the key criteria companies use to determine whether purchasing computer systems or other capital equipment makes economic sense in any given time frame. Since the schedules were last set in 1986, the computer industry has argued that its products need a faster depreciation schedule. In a market built on a product cycle of 18 months, they point out, a five-year depreciation schedule ensures that most businesses will never recover their IT investments.
It stands to reason that adjusting depreciation schedules to better reflect the actual life cycles of computer and networking equipment would give many companies an irresistible incentive to increase their IT spending. Although, for the most part, the resulting boost in sales by technology vendors would be a one-year phenomenon, it would come in the most crucial year ever for many tech companies - 12 months that may well determine if they can survive at all.
But then the question becomes: What kinds of technology would corporations most likely invest in this year? Clearly, priorities have shifted since Sept. 11, and budgets are already being adjusted to accommodate those priorities. This could have the effect of throwing yet more change and uncertainty into the technology sector in a year thats already seen more than its share of instability.
For instance, companies that sell security software, devices or services could reasonably be expected to see huge spikes in revenue as enterprises throughout the private and public sectors reassess their vulnerabilities and rush to correct them. But early anecdotal evidence suggests that, in many cases, the money now being earmarked for increased security is coming from a reallocation of existing IT budgets - a zero-sum game for the industry as a whole, and a trend that could prove disastrous for vendors whose business models assume an uninterrupted upgrade cycle.
Even in a sector as dynamic and accustomed to rapid change as technology has become, that spells chaos.
Yet, it also spells opportunity for companies that produce what until now have been niche security technologies. Foremost among these may be the makers of biometric identification devices - e.g., fingerprint and iris scanners, and voice and face recognition systems. While most of these products are now playing in the relatively small market for facilities access, expect their adoption to rapidly expand into areas of network security, especially at the client level, where password systems have proven insufficient.
While biometric technologies have failed to reach an acceptable price point before now, the urgency of security needs will trump cost considerations in a number of areas. The investment community has caught on quickly. Since Sept. 11, shares of Viisage Technology, which makes face recognition software, had soared more than 600 percent by last week. But Viisage offers a high-end solution suitable primarily for airports, train stations and other centers of high-volume public traffic. The greatest growth in biometric access technology will be realized in cheap, rapid deployment of single-identity solutions, such as fingerprint locks for laptop computers or network access devices.
The bottom line is that while the confluence of government stimulus and corporate spending plans do indeed portend recovery for the sector, the shifting priorities in post-Sept. 11 America could make that recovery painful in the extreme.

Editor-In-Chief

rob.fixmer@ziffdavisenterprise.com

Rob joined Interactive Week from The New York Times, where he was the paper's technology news editor. Rob also was the founding editor of CyberTimes, The New York Times' technology news site on the Web. Under his guidance, the section grew from a one-man operation to an award-winning, full-time venture.

His earlier New York Times assignments were as national weekend editor, national backfield editor and national desk copy editor. Before joining The New York Times in 1992, Rob held key editorial positions at the Dallas Times Herald and The Madison (Wisc.) Capital Times.

A highly regarded technology journalist, he recently was appointed to the University of Wisconsin School of Journalism's board of visitors. Rob lectures yearly on new media at Columbia University's School of Journalism, and has made presentations at the Massachusetts Institute of Technology's Media Lab and Princeton University's New Technologies Symposium.

In addition to overseeing all of Interactive Week's print and online coverage of interactive business and technology, his responsibilities include development of new sections and design elements to ensure that Interactive Week's coverage and presentation are at the forefront of a fast-paced and fast-changing industry.